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Entry, Dumping, and Shakeout

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  • Richard H. Clarida

Abstract

This paper investigates the relationship between entry, demand, and dumping in the context of a two country Ricardian model of international trade. Dumping - the export of goods at a price below average cost - can arise in the free trade equilibrium if the two countries differ in their initial stock of technological knowledge. As in Jovanovic (1982), I assume that firms in one of the two countries can only acquire knowledge about the technology for producing one of the goods by actually producing that good. Because all firms are ex ante identical in one of the countries, and ex post efficient firms earn positive rents in equilibrium, competition for these rents can result in entry to the point that the equilibrium price is driven below average cost. If world demand is high enough, entry among ex ante identical firms can push down the world price below the opportunity cost of production of new entrants in one country, and that country can in fact initially export the dumped good in equilibrium. Interestingly, and in contrast to models of dumping in cyclical downturns, dumping will not occur with endogenous entry if world demand is too low. Despite the fact that high world demand induces so much entry that price is driven below opportunity cost, welfare in both the dumping (exporting) country and the importing country improve in the free trade dumping equilibrium relative to autarky.

Suggested Citation

  • Richard H. Clarida, 1991. "Entry, Dumping, and Shakeout," NBER Working Papers 3814, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3814
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    References listed on IDEAS

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    1. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
    2. Bernhardt, Dan, 1984. "Dumping, adjustment costs and uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 8(3), pages 349-370, December.
    3. Krueger, Anne O & Tuncer, Baran, 1982. "An Empirical Test of the Infant Industry Argument," American Economic Review, American Economic Association, vol. 72(5), pages 1142-1152, December.
    4. Takacs, Wendy E., 1982. "Cyclical dumping of steel products : Comment," Journal of International Economics, Elsevier, vol. 12(3-4), pages 381-383, May.
    5. Richard Ericson & Ariel Pakes, 1992. "An Alternative Theory of Firm and Industry Dynamics," Cowles Foundation Discussion Papers 1041, Cowles Foundation for Research in Economics, Yale University.
    6. Davies, Stephen W. & McGuinness, Anthony J., 1982. "Dumping at less than marginal cost," Journal of International Economics, Elsevier, vol. 12(1-2), pages 169-182, February.
    7. A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring.
    8. Jovanovic, Boyan & Lach, Saul, 1989. "Entry, Exit, and Diffusion with Learning by Doing," American Economic Review, American Economic Association, vol. 79(4), pages 690-699, September.
    9. Arye L. Hillman & Eliakim Katz, 1986. "Domestic Uncertainty and Foreign Dumping," Canadian Journal of Economics, Canadian Economics Association, vol. 19(3), pages 403-416, August.
    10. Gruenspecht, Howard K., 1988. "Dumping and dynamic competition," Journal of International Economics, Elsevier, vol. 25(3-4), pages 225-248, November.
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    Cited by:

    1. Staiger, Robert W., 1995. "International rules and institutions for trade policy," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 29, pages 1495-1551 Elsevier.
    2. Crowley, Meredith A., 2006. "Do safeguard tariffs and antidumping duties open or close technology gaps?," Journal of International Economics, Elsevier, vol. 68(2), pages 469-484, March.
    3. Emmanuel Petrakis & Eric Rasmusen & Santanu Roy, 1997. "The Learning Curve in a Competitive Industry," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 248-268, Summer.
    4. Miyagiwa, Kaz & Ohno, Yuka, 2007. "Dumping as a signal of innovation," Journal of International Economics, Elsevier, vol. 71(1), pages 221-240, March.
    5. Meredith A. Crowley, 2001. "Antidumping policy under imperfect competition," Working Paper Series WP-01-21, Federal Reserve Bank of Chicago.
    6. Meredith A. Crowley, 2007. "Cyclical dumping and U.S. antidumping protection: 1980-2001," Working Paper Series WP-07-21, Federal Reserve Bank of Chicago.
    7. Gallaway, Michael P. & Blonigen, Bruce A. & Flynn, Joseph E., 1999. "Welfare costs of the U.S. antidumping and countervailing duty laws," Journal of International Economics, Elsevier, vol. 49(2), pages 211-244, December.
    8. Falvey, Rod & Wittayarungruangsri, Sarut, 2006. "Market size and antidumping in duopolistic competition," European Journal of Political Economy, Elsevier, vol. 22(3), pages 771-786, September.

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